To define preferences, we apply both a quantitative and qualitative methodology, with stock picking deliberately excluded from our framework given our preferred diversified approach to theme investing – although stock picking could in theory provide an additional source of alpha. Our quantitative investment theme ranking applies select style/factor components that can exert a significant influence on performance. The model looks at stocks within a theme in an equally weighted way and is calibrated to minimize turnover while still delivering solid excess returns.
The main model factors (volatility-weighted) applied to the theme's reference list of stocks are listed below:
- Valuation: (i) 1y trailing free cash flow (FCF) yield; (ii) 1y trailing earnings yield; (iii) 1y trailing price to book
- Momentum: percentile rank of the combined 12m price and 3m earnings revisions score
- Quality: improvement in key ratios such as for profitability, financial health or efficiency. Basically observing changes rather than absolute levels of quality.
By also applying a qualitative overlay, we can look at factors such as CIO House View consistency and vulnerability to identified key global risks, as well as review theme-specific risks also published in the Risk Radar publication series. We also discuss upcoming catalysts such as new regulation being introduced or theme specific events occurring, and consider key macroeconomic trends.
The combination of these quantitative and qualitative factors help investors understand why we prefer some investment themes over the shorter term and deem them suitable for increasing thematic investments. In addition, by tracking ranking changes within our framework, we monitor shifts in the theme’s relative attractiveness from one period to the next. These rankings form the basis of our tactical preferences for long-term theme investing, although we maintain high conviction on all our themes over the long run. A diversified approach to themes is recommended, as is a long-term investment horizon.